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Earnings call: Fujitsu reports record highs in Q2, eyes growth in security

EditorEmilio Ghigini
Published 04/11/2024, 08:34
© Reuters.
6702
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Fujitsu Ltd. (TYO: 6702), a global information and communication technology company, announced its financial results for the second quarter of the fiscal year 2024. The company recorded a slight revenue increase of 0.9% year-over-year, reaching ¥1,696.6 billion, with the Service Solutions segment being a significant growth driver.

Fujitsu's adjusted operating profit for the quarter saw a substantial rise of 56.6% from the previous year, achieving record highs. CFO Takeshi Isobe highlighted the company's focus on profitability improvement and growth initiatives, particularly in national security-related deals and digital transformation services.

Key Takeaways

  • Fujitsu's revenue increased by 0.9% to ¥1,696.6 billion, with Service Solutions leading the growth.
  • Adjusted operating profit surged by 56.6% to a record ¥88.7 billion.
  • The company experienced a 69% revenue increase in the modernization business and over 30% growth in Fujitsu Uvance orders.
  • Despite international revenue decline, the firm expects further growth, especially in national security-related deals.
  • Fujitsu maintains its full-year revenue forecast at ¥3,760 billion and an adjusted operating profit target of ¥303 billion.

Company Outlook

  • Fujitsu anticipates growth in the second half of the fiscal year, particularly from large-scale national security-related deals.
  • Revenue target for Uvance is set at ¥450 billion for FY 2024 and ¥700 billion by FY 2025.
  • The firm is actively investing in growth initiatives and focusing on profitability improvement across its segments.

Bearish Highlights

  • International revenue declined by 4% due to the carveout of low-profit businesses.
  • Hardware Solutions segment experienced a 4.4% revenue decline.
  • Ubiquitous Solutions saw a 16.9% drop in revenue.

Bullish Highlights

  • Service Solutions segment reported a 7% revenue increase in Japan.
  • Adjusted operating profit margin improved to 4.7%.
  • Device Solutions revenue grew by 3.3%, with a profit increase of ¥4.1 billion.

Misses

  • The company recorded a one-time loss of ¥20 billion due to the expansion of the self-produced support system for human resource transformation.
  • Demand recovery in the Device Solutions segment was slower than expected.

Q&A Highlights

  • Consolidated results and market demand for service solutions met expectations.
  • Orders in Japan for the first half were similar to the previous year, and no significant changes in demand are anticipated for the second half.
  • The financial forecast for FY 2024 remains unchanged, with expected revenue of ¥3,760 billion and adjusted operating profit of ¥303 billion.

Fujitsu's commitment to enhancing digital transformation is evident in its plan to implement an ERP system in service solutions by FY 2024. The company's focus on improving profitability and executing its midterm business plan is expected to drive performance in the coming periods. Despite some setbacks, Fujitsu's overall strategy and projections suggest that it is on track to meet its initial goals and enhance corporate value.

Full transcript - None (FJTSF) Q2 2025:

Takeshi Isobe: Good afternoon, ladies and gentlemen. My name is Isobe, CFO. I'd like to give you the outline of the Financial Results for Second Quarter. Please go to Page 3. I will start by presenting our financial highlights for the first half of fiscal ‘24. Most important segment is Service Solutions, which continue to post steady improvements and higher revenue and operating profit. Revenue for the first half was ¥1,017.5 billion, an increase of 3.4% over the last year's first half. For business in Japan demand continued to be strong. All digital transformation modernizations services and revenue in Japan wrote 7% outside of Japan. However, because of the carveout of low profitability business, revenue declined by 4%. Excluding the carveout revenue was essentially unchanged. Adjusted operating profit for Service Solutions was ¥88.7 billion, increase of ¥25.2 billion compared to the first half of fiscal ‘23. In addition to the impact of higher revenue, there has been steady progress over profitability improvement. Adjusted operating profit margin improved by 2.3% up to 8.7%. In terms of first half results, in both cases, there were record results for Fujitsu. Total consolidated revenue was one ¥1,696.6 billion 0.9% higher than previous year. And the revenue declined in Hardware Solutions and Ubiquitous Solutions. Adjusted operating profit was ¥79.5 billion, ¥20.7 billion up from the previous year. Adjusted operating profit margin was 4.7%, up 1.7 percentage point. In terms of the first half, results adjusted operating profit was a record for Fujitsu showing an increase of 56.6% over the last year's first half. Page 4 shows the overview of the financial results for each business segment. I will discuss the results for each segment starting from the next page, but this gives you overall view. As I touched upon just now Service Solutions, our growth driver had a higher revenue and strong pace of progress and profitability improvement. Hardware Solutions, both revenue and profit fell as there was a pullback from last year's large-scale deals and the negative impact of the weak yen. Results in the Device Solutions, on the other hand, benefited from the weak yen, both revenue and profit increased. The inter segment eliminations and corporate reduction in the inventories led to improvement in unrealized gains. From Page 5, we will show you the result of each segment. Page 6, the Service Solutions, revenue was ¥1,017.5 billion, increase of 3.4% from the previous year. Primarily in Japan there were continued increases in demand for digital transformation and modernization services. Revenue from our business in Japan rose by 7% from the prior year. Adjusted operating profit was ¥88.7 billion up ¥25.2 billion from the prior year, and adjusted operating profit margin was 8.7% improvement of 2.3 percentage points compared to the previous year. I will now explain the components of this increase in profit with a waterfall chart. Page 7 shows the factors that caused the increases and decreases in adjusted profit. Operating profit in Service Solutions. Operating profit for the first half of our fiscal ‘23 was ¥63.4 billion, and that is the starting point of examining the exchanges in operating profit in the first half of the year. First factor is an increase of ¥16.6 billion in adjusted operating profit for the impact of higher revenue. And the second factor is an increase of ¥25.2 billion from the improved profitability. We continue to make progress in initiatives to improve productivity such as standardization in our development work processes and stronger management of profitability. And in addition, in the regions and international, there will see a positive impact from the carveout of low profitability business. The gross margin improved by 2.6 percentage point. Third factor is decline of ¥16.6 billion related to increased expenses, primarily investment in the growth business. We continue to actively implement investments in the direct growth of business, such as development of Uvance offerings, aggregation of knowledge to support the rapid growth in the modernization business and investment in employee training and development. Adding all this up, adjusted operating profit for the service solution was ¥88.7 million. Page 8. I will now provide supplemental information about the factors in the previous waterfall chart. First status of orders, which led to increasing revenue. This page shows the orders in Japan and the fell by 1 percentage point. First of all, the private enterprise business segment, which were up 3% from the prior year. There was continued growth in the project related to digital transformation, sustainable transformation, as well as a modernization for mission critical systems, which continued to strength of growth, a wide range of customers including manufacturing, mobility, retail and distribution, and the orders were up 9% in the financial business segment. We were able to win multiple large-scale deals to upgrade mission critical systems for financial institutions. In public and healthcare segment orders fell 10%. This represents improvement from the first half of last year when we received orders for large scale, multiple multi-year deals from the customers in the public sector. Mission critical and other segment orders were up 11% from the previous year. We'll received multiple large-scale deals such as upgrades for mission critical systems. We are waiting foresee that we will receive multiple large-scale deals in the second half, mainly in the field of national security. Overall, our business in Japan is roughly at the same level it was in the first half of last year. We were significantly impacted by the pullback of public and healthcare segment in the first half of 2024 from the large-scale contracts we won in ’23. In the private enterprise finance and mission critical and other segments, we were able to surpass even the high level of orders received in ‘23. We accumulated a large balance of orders and we expect no major changes in the pipeline. And we already foresee several large-scale deals in the second half of the fiscal year, and we expect to be able to continue the growth in sales revenues. Page 9 shows the orders in the international regions. The orders for the Europe and America, America's regions declined compared to last year. This represented a pullback from the last year's large scale. We anticipate receiving large deals in the second half of the year. Our orders for the Asia-Pacific region was up 25% in Nordic areas we were able to win multiple, multi-year contracts from customers in the finance and retail industry. Page 10 shows the progress of Fujitsu Uvance, which we are positioning as the most vital area for the growth of the business. Orders received in fiscal ‘24 amounted to ¥223.1 billion. Major increase over 30% from the last year. Below is the revenue in the bar graph a deep blue portion depicts the revenue from the four vertical areas, which are cross industry areas. And the light blue are revenues from three horizontal areas, which are technology platforms that support the cross-industry areas. Overall revenue for the first half of the year was ¥200.7 million, up 31% year on year of this vertical areas grew by 93%, nearly doubled the revenue of the last year. This share of the revenue from Fujitsu Uvance in service solutions increased from 16% of the previous year, up to 20%. For Uvance orders and revenue are in good shape and progressing at the strong pace towards our target. On the right-hand side of the graph, there is a revenue target for both fiscal ‘24 and fiscal ‘25. Revenue target for ‘24 is ¥450 billion, an increase of approximately a ¥100 billion from the previous year, and the growth of 22%. Growth in the first half was 31% slightly above our plan. We are seeking to achieve our target for Uvance revenue of ¥700 billion in fiscal 2025, the final fiscal year of midterm management plan in which we seek to help Uvance representing 30% of the total revenue in service solutions. Page 11 shows the status of the modernization business. Revenue for the first half of this year was ¥82.8 billion a large increase of 69% from the previous year. The full year revenue targets shown on the right-hand side is ¥200 billion, an increase of 69% from the previous year. Therefore, for the first half of 2024, modernization business has progressed according to the plan. Excluded from this figure revenue that will overlap with Fujitsu Uvance and how do a revenue from modernization business. We will improve profitability through the knowledge aggregation and automation while expanding our digital transformation and sustainable transformation business. Page 12 shows the supplemental information about the status of our efforts to improve profitability and the status of our growth investment. Increasing profit resulting from a profitability improvement in the first half of the year was ¥25.2 billion. The gross margin was 35.1%, improvement of 2.6 percentage point from the previous year. As shown on the graph, profitability is continuing to improve at a steady pace year after year. We are certainly continuing profitability improvement measures such as standardization of development automation, bringing working house. In addition, improvement in monitoring profitability has also contributed to the improvement in profitability. Of course, customers have recognized the quality and the value we deliver. And another positive point has been that we have made progress on setting appropriate pricing. The impact of the business portfolio changes that we have done in the regions, the international regions cannot be also seen here. On the right-hand side, expansion of the growth investment was ¥16.6 billion, representing a negative impact on the operating profit for the year. In addition to developing offerings for Fujitsu Uvance and knowledge aggregation to handle the expansion of the modernization business, we have continued proactively, systematically the direct investment toward the business growth, such as investment in developing and hiring employees with special skills as well as strengthening security. The business of the growth in service solutions are events, modernization business and consulting. And we are moving ahead with investment to support the acceleration in expanding these growth businesses while keeping a close eye on the investment. Next page 13. I will briefly touch upon the status of each subsegment in service solutions. First, global solutions, revenue was ¥246.7 billion, up 13.3% from the prior year. On an adjusted basis, the subsegment posted an operating loss of ¥6.0 billion. Revenue grew at a double-digit pace, primarily from Fujitsu Uvance for profit. However, because of a large expansion in investments for the growth business, the subsegment continued to record a loss. We accelerated the development of offerings in Uvance, primarily in the vertical areas, and we are strengthening investment in delivery standardization such as expansion of the modernization knowledge center. We are making progress as planned in dealing with expansion of our offerings business and the strong demand for digital transformation and modernization. We expect through the impact of a higher revenue and improvement in the gross margin in the second half, we should be able to achieve solid level of profit for the full year. In the Japan regions, revenue was ¥583.3 billion, up 2.1% from the previous year. Adjusted operating profit ¥91.4 billion, up ¥19.2 billion from the previous year. Expansion of the modernization related demands such as a digital transformation business and the mission critical system upgrades led to an increasing revenue, mainly in customers in mobility in final sectors. In addition to the impact of higher revenue, we also continued making progress on improving profitability. Adjusted operating profit margin had a significant three percentage point improvement from the prior year to 15.7%. In international regions, revenue was ¥275.6 billion down 4.4% year on year. Adjusted operating profit, ¥3.2 billion enabling us to post a profit for the first half, representing improvement by ¥9.4 billion because of the negative impact of the carveout of the low profit German private cloud business revenue declined. Excluding that impact revenue was essentially unchanged from the previous year. In terms of the profit significant effect of the business portfolio transformation led to improved profitability. Page 14, this page shows the other segments besides service solutions. First is Hardware Solutions. Revenue was ¥456.6 billion down 4.4% from the previous year. There was an adjusted operating profit of ¥3.1 billion, representing a deterioration of ¥14.3 billion from the previous year. In system products, in addition to the pullback from the large-scale business deals in the public sector from the previous year, the weak yen led to higher component procurement costs, which resulted in decline in operating profit and revenue. In network products, demand both inside and outside of Japan this year has been at about the same level as the previous year. On the other hand, we are continuing our investments in product development and preparing for the next growth cycle. Below that is Ubiquitous Solution, revenue was ¥108.6 billion down 16.9% from the previous year. Adjusted operating profit was ¥11.3 billion, an increase of ¥2.3 billion from the previous year. The decline in revenue was a result of the exiting of the business in Europe as announced in the previous fiscal year. The business in Europe was a very competitive environment in which it was difficult to ensure profitability. It is for this reason that Fujitsu exited the business in April of this year. In terms of profit exiting this business has streamed losses or in other words, had positive effect. Profitability improved to the point that exceeded the negative impact of the increase in cost from the weakened yen. Page 15, Device Solutions, revenue was ¥147.4 billion up 3.3% from the previous year. Adjusted operating profit was ¥13.4 billion, an increase of ¥ 4.1 billion from the previous year. The impact of foreign exchange movements in this segment was different from the Hardware Solutions and Ubiquitous Solutions. It had a positive effect on both revenue and profit for the exported products from device solutions, but results in the main business of the segment excluding the impact of foreign exchange movement was slightly lower than expected. The full-scale recovery in demand has been lower than initially planned, and it is expected to occur in the second half of the year. Below that is inter segment elimination corporate. There was adjusted operating loss of ¥37.1 billion with decrease in expenses of ¥11.3 billion compared to the previous year. In the first of the fiscal year group-wide business growth investment were slightly lower. In addition, last year's temporary accumulation in inventory assets for transactions within Fujitsu group was eliminated, resulting in improvement in unrealized gains and was another positive factor. The business growth investment managed by inter segment elimination and corporate include advanced cutting-edge research, mainly in field of AI and quantum computing and enhancements to our overall management foundation. We will continue the planned implementation of these investments. We have been advancing one Fujitsu program, the global group-based ERP deployment project and investment to strengthen our management foundation. We plan to launch ERP system in the service solutions in Japan in fiscal 2024. We will accelerate our digital transformation and further increase the speed and optimization. Page 16. I will now take our first half operating profit, which I discussed up to now got progress toward the full year target. The upper part shows total adjusted operating profit for the first half the year ¥79.5 billion representing progress completion rate of 24.1%, ¥330 billion. This is an improvement of 6.2% from the previous year. Looking at service solutions in the lower half, operating profit progress made in the first of the fiscal year was 31.7%, improvement of 5% from the previous year. As usual, operating profit is skewed in the second half of fiscal year. Operating profit is slowly improving. Page 17. This is related to the improvement of the portfolio and to improve corporate value. I will be basically touching upon that. For the first half of fiscal 2024, we recorded a loss of ¥23.1 billion as adjusted item. This was mainly due to approximately ¥20 billion cost of implementation of time limited expansion of self-produced support system with the scale of ¥20 billion transforming our human resource portfolio. This is related to re-skilling and job posting system. In addition to this, we are implementing a time limited expansion of self-produced support system for manager level employees without direct customer responsibilities to accelerate our productivity improvement and optimal positioning of human resources. The table on the bottom of the slide shows adjusted consolidated results, adjusted items and consolidated results before adjustment for the first half of this fiscal year. Page 18, I will now review the status of cash flows and balance sheet. Page 19. Cash flows, excluding one-time cash flows core free cash flow was ¥93.7 billion an increase of ¥2.6 billion. Toward the bottom of the table free cash flow including onetime cash inflow was ¥48.2 billion increase of ¥13.5 billion from the previous year. This is part due to pullback from the cash outflows related to acquisitions made in the previous year. Page 20 shows the status of assets, liabilities, and equity. I will omit the explanation. This concludes my overview of the financial results for the first of the fiscal year. Though it is not in the slide, I will briefly comment on the progress. The result of the first half of fiscal 2024 were mostly in line with our plan. In each of the subsegments result for service solutions show slight improvement, mainly in improved profitability. Hardware Solutions and Ubiquitous Solutions were basically in line with the plan, although there were some currency exchanges. On the other hand, Device Solutions, the recovery in demand for electric components has been a bit slower we anticipated. So, the results will below our plan. Overall, consolidated results were in line with our plan. Market demand for service solution was also almost in line with our plan. The large scale of amount of orders for business in Japan for the first half was almost the same level of the previous year. Impact of the timing of a winning large-scale project, from looking from the pipeline expected business deals for the second half of the year, we did not see any major changes in the increase of the demand. We will continue to make progress on both expanding revenue and improving profitability to achieve our plan. Page 22. This shows our financial forecast for 2024. Revenue is forecasted to be ¥3,760 billion. Adjusted operating profit is forecasted to be ¥303 billion. All of these remain unchanged. Page 23, there's no change in the forecast. We will progress according to plan. On Page 24, it shows the breakdown of the business segment information and projections for the first and the second half of the year. I will just touch upon service solutions. The subsegments adjusted operating income of the first year shows ¥88.7 billion. Second half of the year is an increase by ¥17.5 billion at ¥191.2 billion. The first half of progress is improving versus the last fiscal year, and in the second fiscal year, it is forecasted to be slightly less than first half. On Page 25, I will now explain the adjustment items and consolidated results prior to adjustment. As I have explained, there's no change to our adjusted consolidated results. On the other hand, as an adjustment item to the operating item, we are revising onetime loss of ¥20 billion recorded in the first half of the year. At that time, after taking into account tax effects, we calculated will be negative impact of ¥14 billion. As I explained in the first half of the fiscal 2024, one-time loss was due to cost related expansion of the self-produced support system for transforming our human resource portfolio to accelerate transformation of our human resource portfolio. As an additional measure to top of the efforts, we have already been making on the job posting system and reskilling. We implemented time limited expansion of the self-produced system, including that adjustment the operating profit, prior to adjustment, expected to be ¥310 billion, which will be declined by ¥20 billion. Page 26 core free cash flow and a free cash flow for both projected with ¥220 billion. They remain unchanged. Although we anticipate one-time expenditure related to transforming our human resources portfolio, in the second half of the year. There will be improvement in capital investment and other working capital for a full year result. We anticipate that we will be able to achieve our initial plan. Lastly, the first half of the fiscal year marked halfway point of our midterm business plan as the progress for the midterm business plan. There are some variations, but we believe we are progressing mostly according to plan, particularly in our growth drivers service solutions. We are seeing steady improvement in profitability as a result of our efforts even as we making progress in progressing our portfolio initiatives such as shift to Fujitsu Evance, transformation of our business portfolio in one stronger growth power. We must have optimal human resource portfolio. We will have decisive actions as we mentioned today, and that we will try to accelerate the human resource portfolio and business portfolio. We will continue to work to achieve the mid-term management plan and sustainable improvement to our corporate value. This concludes my presentation.

End of Q&A:

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